Gold set a new high at $2,075 in August 2021, and despite a downward correction from these levels, the price is still up by 21% year-to-date. ABN Amro strategists said that they expect gold to surge in 2021 on lowering US real yields and a weaker dollar.
The catch is that long gold is still a crowded space with the technical picture deteriorating and normal relationships may not be functional as always. Generally speaking, the year-end 2021 projection stands at $2,000 per ounce.
Outlooks for gold prices are still positive. For starters, the markets expect the Fed to maintain policy rates low in the coming years. The Fed will also restrict the surge in US treasury yields to support the economy. It is expected that the US Treasury yields will be lower in the coming year.
If the inflation expectations tend to remain around the current level, the lower US Treasury yields will turn into lower US real yields. That becomes negative for the US dollar which is simultaneously positive for the gold prices.
Secondly, this year’s fiscal deficits have surged considerably. In the coming year, these deficits as % of GDP would most likely drop but they will remain quite considerable. The integration of a large fiscal deficit and monetary stimulus will probably continue to be a major worry for investors. Thus, it is highly likely that gold prices will be higher than the US dollar putting these dynamics into context.
“The total ETF positions are still huge. Since the peak on 15 October, they have declined by only 4%. These positions are still 28% higher than at the start of the year and 29% higher than the former peak of 20 December 2012. In short, gold is still a crowded trade, and investors are doubting. In 2013 a liquidation of 36% of the total outstanding ETF positions resulted in a decline in gold prices of 30%. These positions remain a risk.”
For now, the technical image has been deteriorating recently, and prices are holding above the 200-day moving average (located at $1,810 per ounce). The market tested that zone but then rebounded moments later. If the gold prices manage to drop sustainably below the 200-day moving average, the upside momentum will be over. Experts and analysts at ABN Amro explained:
“By substantial we mean in normal trading conditions with a weekly close below the 200-day moving average. In the coming weeks, trading conditions are far from normal as the market is very thin at the end of the year and the start of the new year.”
The vaccine has now come, and the economic outlook is gradually improving. Always, gold tends to weaken in case an economic recovery goes hand in hand with the expectations of stricter monetary policy and higher rates.
However, the gold prices have the tendency to surge whenever the economy recovers but monetary stimulus remains quite in place, and US real yields decline. That is also the base case for the strategists. They concluded by saying:
“But we are in an exceptional environment where normal relationships are challenged. This could also be the case for this relationship.”